. RELEASE6 c lllllllmlllllllllIlMlllllillllll’ . LM090763 In L)epartments of Defense and State Coproduction and licensing orrangaments cover a diversity of defense items msnufac- tured in other countries. Although the&? arran oments contain clauses which restrict trens Bers to a third country of U.S. defense items, no formal procedures or mechanisms exist to insure phat such transfers are not made vrithout prior approval of the President. There is a lack of statutory coverage on sales of defense servicxx, which include the sate of defense information. The United States has no statI-tory control over third-country trans- fers of defense articles produced by tha pur- &sing country using such defense infonna- tion. There is no restraint on granting U.S. azxxoval to third-country transfers under ID-76-23 DEC. 2J.975 B-l 63582 a The Honorable Thomas E. Morgan, Chairman , I. C!3 , cc Committee on International Relations u-.‘ - House of Representatives T Dear Mr. Chairman : This report is in response to section VII of your latter of February 5, 1975, asking us to study military and mil itary-related assistance programs abroad. As you requested in subsequent discussions, we also reviewed the legality of certain transfers of F-104s aircraft from Italy to Turkey in view of the congressionally imposed cutoffs of military assistance to Turkey, This information is contained in appendix I. From the inception of the program in 1960, 33 coproduction agreements have been signed valued at $9.8 billion and agreements valued at $2.1 billion are under consideration. These agreements involve the pro- duction of such diversified defense items as armored personnel carriers, howitzers. tanks, rifles, machine- guns, ammunition, he1 icoptt 1-s, anti-tank rockets, air- craft, and vessel 6. WC also identified 387 industry-to-industry 1 icensing arrangements, 71 percent of which cover the production of aircraft parts. other mi3 itary items being produced in foreign countries under 1 icensing arrangements with P.S. firms include aircraft, missiles, ammunition, armor, radar, fsonar, gyroscopes, and elec- tr ical parts. 1 Formal procedures or mechanisms do not exist for detecting whether defense articles snJd tc foreign countries are transferred to third countries without the prior approval of the Prer,ident. Coproduction and 3 icensin7 arrangements contain clauses which restrict third-cruntry transfer of U.S. defense items. However, as in the case of defense . - B-l 63582 articles which are sold, there are no formal procedures or mechanisms to insure that transfers to third coun- tries are not made without the prior approval of the President. Controls over the disposition of military items produced under license in foreign countries is one of the concerns in this tyw of arrangement. In addition, changing political conc?itions sometimes makr! it necessary to amend license provisions. Our review of the legality of certain transfers of F-10& aircraft from Italy to Turkey revealed that . neither of the two salp,: of 18 F-104s aircraft was illegal despite the cL..gressiona13y imposed cutoff of arms to Turkey. The first cutoff prohibited the use of appropriated funds by the U.S. Government for military assistance cr for sales of defense articles and services to Turkey. The second cutoff prohibited all military assistance, sales of defense articles and services, and licenses for transportation of arms, ammunition, and implements of war to the Government of Turkey, as we11 as the use of appropriated funds therefor. S into none of the parts of the Memorandum of Undersranding reflect any United States-Turkey transaction, none of its provisions are directly affected by either cutcff. Restriction on third-country transfers in sub- section 3(a) of the Foreign Military Sales Act are not applicable to sales of defense services, which includes the sale of defense information. Consequent1 y, the United States has no statutory cw?roP over tprrd- country transfers of defense artlc..es produced by the purchasing country using such defense inf 3rmat ion. i There ia a significant difference between the ! restrictions on third-country transfers contained in subsection 3(a) of the Foreign Military Sales Act and those included in the International Traffic in Arms Regulations (22 CFR 124.10(m)). Under the provisions of the Foreign Nilitary Sales Act, the L’rssident can- not give his consent tc the transfer unle:ls the United 1 . States itself would transfer the defense article to the country. No such restraint exists on the granting of 9 U.S. approval to a ,ransfer under the Arms Regulation. + 2 \ \ .- .I .- . -9 . --. ‘r. B-163582 5 Several studies have been made which address the impact of arms sales on U.S. employment. Howe*Jer , these studies focus on reduced defense expenditures, not specifically on the employment impact of coproduc- tion and licensing arrangements. ‘If the assumption were made that foreign coun- tries would buy directly from the Unikd States were no co2roduction alternative available, coproduction and licensing arrangements could result in ~7 loss to U,S. 1 abor . Conversely if nti sales of an item would be made were it not to be coproduced, coproduction would have a positive effect because part of the item would be produced in the United States. If 1 iceneing agreements are considered a8 an extension of U.S. production capabilities, they could also be considered to 5ave a beneficial effect on the U.S. economy since the L’.S. firm would be realizing . license and royalty fees which contribute to the pro- fit margin of the firm and the U.S. tax b?se, as well as to the balance of payments. As requested by your office, we have not obtained ~. I written comments from the Departments of defense and L-- State on matters included in this report. ,r “.i Comptroller General of the United States 3 --w--s--Contents Introduction Legislation Background Advantages and disadvantages of coproduction and licensing program 7 Control over third-country transfers El Impact on U.S. employment 12 Future coproduction effort--the F-16 aircraft program 13 Schedule of coproduction and licensing 19 agreements 8. Examples of licensing and coproduction 24 projects Legal review of F-104s aircraft transfer from Italy to Turkey 27 Bibliography 42 \ \ APPENDIX I APPENDIX I , COPRGDUCTIGN-_. ..--.__ PROGRAMS AND LTCENS-. i6G -. ARRANGEME~u'T~-~'E'o~~~~~~~~~~~~~----_..--mP-.m.--- . - -.-_- SNTRODUCTIONv- The term “coproduction“ refers to the program by . which the UnIted States and an eligib!e country join together in producing a U.S. mil itaty system or item in the foreign country. The combined effort may be government-to-government, industry-to-industry, or a . mix of government and private resources. Coproduction projects may be implemented either directly through the Foreign Military Sales prcgram or indirectly by designated commerciai firms through specific licensing arrangements. The arrangements enable an eligible foreign government, international organization, or designated commercial producer to acquire substantial know-how to manufacture or assemble, repair, maintain, and operate in whole OL in part a specific weapon, com- munication, or support system for an individual mil itary item. The know-how furnished by the United States may include research, develcpment production data and/or manufacturing machinery or tools, raw or finished mater ial, components or major subassembl ies, manager ial skille, procurement assistance, or quality control proceiiur es. Coproduction may be limited to the assembly of a few end items with a small input of parts produced incountry or it may extend to a major manufacturing , effort requiring the buildup of capital industries. pajor objectives of coproduction projects, as defined by Department of Defense directive:, are to (1) enable eligible countries to improve mrl itary readiness through expansion of their technical and . military support capability and (2) promote U.S. allies’ standardization of military mater ial and equipRent, which in turn would generate the establish- \ ment or’ uniform procedures and logistics support and I would expand mu1 t:national operational capabil it ies. 1 .. - . APPENDIX I APPENDIX I Scope of coproduction agreements Coproduction i;rOgiCiZlS currently involve the pro- duction of such diverse defense items as armored per- sonnel carriers, howitzers, tanks, rifles;machineguns, a,nmunition, he1 icopters, anti-tank rockets, ‘aircraft, and vessels. (See app. III for examples of projects.) From the inception of the program in 1960, 33 coproduc- tion agreements have been signed valued at $9.8 bill ion. (See app. II.) . Five coproduction agreements valued at $2.1 bil- lion are under consideration for projects in Iran and Korea. The matter of coprocluction in Iran has been the subject of an interagency study and we were informed that a classified report has been prepared, with an executive summary for the President’s consideration. * Scope of licensing arransments-- -- Presently there are 387 industry-to.-industry licensing arrangements bith 15 countries and NATO. More than 90 percent oC all these arrangements are with 6 countries, an<; ;1 percent of the arrangements cover the producti-,‘I of aircraft parts. Other mil i- tary items include aircraft, missiles, ammunition, armor, radar , sonar, gyroscopes, and electr ical pClr ts. (See app. II.) LEGISLATION -_----_ \k U.S. coproduction and licensing arrangements in foreign countries are currently atithorized by the Foreign Military Sales Act of 1368, as amended, and the International Traffic in Arms Regulations :?2 CFR 121-128) which were issued under the Mutual Security Act of 1954. In addition, the Foreign Assistance Act of 1961 authorizes grant assistance for use in copro- duction projects. Foreign Military Sales Act Public Law 90-629, the Foreign Mil itary Sales Act of 1968, as amended, states that the United States will enter into agreements to facilitate the common defense of friendly foreign countries. It provides 2 APPENDIX I APPENDIX I that special emphasis be placed on procurement of milf- tary articles in the United States but that considera- tion of defense articles of U.S.